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Contents:

Prepared Remarks:

Operator

Good day and welcome to W.R. Berkley Corporation's third quarter 2018 earnings conference call. Today's conference call is being recorded.

The speakers' remarks may contain forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words, including without limitation believe, expects, or estimates. We caution you that such forward-looking statements should not be regarded as a representation by us that the future plans, estimates, or expectations contemplated by us will in fact be achieved.

Please refer to our annual report on Form 10-K for the year ended December 31st, 2017 and our other filings made with the SEC or description of the business environment in which we operate and important factors that may materially affect our results. W.R. Berkley Corporation is not under any obligation and expressly disclaims any such obligation to update or alter its forward-looking statements, whether as a result of new information, future events, other otherwise.

I would now like to turn the call over to Mr. Rob Berkley. Please go ahead, sir.

Robert Berkley --President and Chief Executive Officer

Thank you, Amani and good afternoon, all. Thank you for joining us on our third quarter call. On this end, you also have Bill Berkley, our Executive Chairman and Rich Baio, our Chief Financial Officer. Let me give you a quick sense of the agenda, which is similar to what we've done in the past. I'm going to start off with a few comments or thoughts on what's going on at a macro level in the industry, offer a few sound bites on the quarter and then I will in short order hand it off to Rich, who will walk you through the quarter in greater detail.

Before we jump into the agenda, let me just offer a comment on behalf of my colleagues and myself of somewhat of a more personal nature. The cat activity in the third quarter of this year, while not quite in some ways as severe as what we saw last year was still very significant and obviously, we are seeing cat activity in the fourth quarter as well.

It's easy for this activity and this industry to turn into something that's thought of as ratios and numbers, but people should not lose sight of the fact that these are people's lives. From our perspective, we would just like to extend our thoughts and prayers to all those that are affected. Hopefully, that does provide an opportunity for the industry to demonstrate the value it brings to society in helping it get back on its feet in affected areas.

Turning to the business of today, a couple of topics that I'll refer to here and they're topics that we have discussed in the past -- I would suggest they could fall into the category of how much data or perhaps how much pain is required for there to be a change in behavior. Maybe start in with the property markets, particularly cat-exposed property -- yet another quarter has gone by with frequency of severity and for all we can tell, there's not a significant change or appetite for change in behavior in the marketplace.

Yes, you may be seeing incremental change, but it does seem as though the concept of risk-adjusted return, the idea that the dollar is lost for real and that this capital is entitled to a return does continue to be lost on many market participants. This idea, again, continues to be a puzzle to us as just backing up cat losses as if they don't count has never and continues to make no sense to us.

The other area that we and others have talked about more recently -- I think we started to talk about 18, maybe 24 months ago is inflation. As we've discussed with people in the past and others have as well, it comes in two obvious flavors, one being financial -- that seems to get a lot of attention -- the other one being social, which is getting an increasing amount of attention.

In spite of the attention, in spite of all the discussion, it is concerning to us on behalf of the industry that the dialogue and the focus does not seem to be converting into action. Hopefully that will change as we move forward. Certainly, as we have demonstrated and will continue to demonstrate, both of these points are things that we as an organization are very focused on and we believe we are taking appropriate action as we position the business not just today, but also thinking toward tomorrow.

Let me offer a couple of quick sound bites on different product lines, again from a marketplace perspective -- reinsurance continues to be what I would define as a relatively glim picture. I would tell you that we are able to find a few isolated green chutes in the treaty market outside of the United States. The US treaty market continues to be exceptionally competitive and quite frankly, concerning. I would tell you there are early signs of possible encouragement coming out of the fac market, but I think it's premature to call it a trend.

On the insurance side, again, property, we are seeing the market get incrementally better, it remains surprising to use in light of the cat activity that we've seen over the past year, the lack of movement, in particular the London market seems a bit sluggish in responding as it would have historically responded to this level of cat activity. Again, also there's been a lot of chatter, but we'll have to see if that converts into a change in behavior.

I would characterize the GL market in general as steady. Worker's comp -- I think there's been a lot of chatter around the action rating bureaus have taken in moving rates down. At the same time, I would caution people not to overreact to this rate activity or rate action. Given the way worker's comp gets priced off of payrolls, with payrolls moving up, salaries moving up, that certainly helps keep up. In addition to that, obviously, the frequency trend continues to be negative, which unnerves to the benefit of lost cost.

Professional liability from my perspective continues to be among the more concerning parts of the business. In particular, the D&O market, especially the larger D&O accounts, large law firms in certain parts of the medical market give us real reason to pause. Having said that, there are some niche opportunities within the professional space that we continue to find very attractive. Finally, commercial auto -- from my perspective, it certainly continues to improve, but one needs to be thoughtful and selective in how one participates in that market.

As it relates to our results in the quarter, again, I'm going to live most of the details to Rich, so just a couple of comments from me -- I think overall, it was a good quarter. We were pleased with the topline growth. We are growing in the places where the margin is. In addition to that, we are pleased with the rate that we're getting.

So, in the insurance business, as Rich will walk you through, we grew 5%, and if you look at the rate that we're getting in our business, ex-worker's comp, we're getting about 3.9% rate increase. In addition to that, our renewal retention ratio continues to run at about 80%. So, even as we are pushing for rate, we think the integrity of the book is remaining well intact.

The rate that we're getting we think is very appropriate, just going back to that idea of inflation that we touched on earlier and we've talked about in past quarters. While rate in a vacuum is not the sole remedy, it is certainly an important ingredient one needs to obviously take into account as we've also discussed in the past terms, conditions, attachment points, etc.

The loss ratio of 63.5% -- a couple points for cat is in there. By and large, again, not what we would strive for, but from our perspective, not unacceptable given the level of cat activity. Rich will talk about the incremental improvement in the expense ratio. We continue to work diligently on that and there are a lot of people very focused on it and we think we are making progress.

I would tell you or I would caution you it is not going to be a perfect curve or even development. There will be moments where we're able to make meaningful progress like what you saw in the quarter. Then there will be quarters where we have to take a half a step back in order to take two steps forward.

Overall, 95.9% for the quarter -- again, from our perspective, pretty good in light of the cat activity. For those of you who seem to subscribe to the [inaudible], that would translate into a 93.9%.

On the investment portfolio, again, this was an example of us having good foresight, in my opinion, as we thought about inflation and where interest rates are going. We have continued to manage the duration down to the 2.9 years. Rich will give you a little bit more color on this. At this stage, I think that is really one of the main drivers as to why we are having the effect or lack of effect on book value as we see interest rates moving up.

So, I will pause there and I'm going to let Rich get into more of the details for you all. Again, then you'll have the three of us for any questions. Rich, please.

Thanks, Rob, appreciate it. We reported net income of $162 million or $1.26 per share, unchanged from the year ago quarter. Earnings were favorably impacted compared with the prior year by higher underwriting profit, net investment income, and foreign currency gains. Offsetting these positive results were lower net investment gains, primarily attributable to the new accounting treatment on equity securities.

Overall, net premiums written increased 3.4% to approximately $1.62 billion in the third quarter of 2018. Premiums grew 5.1% to $1.5 billion in the insurance segment. The growth was led by a 9% increase in short tail lines, followed by about 8.5% in commercial automobile and 6% in other liability. Worker's compensation reflected the small increase resulting from growth in exposure as a strong economy resulted in increases in payroll, offset by a declining rate environment, as Rob alluded to.

There are pockets of opportunity in the global reinsurance market, although the North American assumed property and casualty environment remains more competitive in other areas. The team has maintained its underwriting discipline and shrunk the business when unable to write business that could achieve its targeted risk adjusted rate of return. Our reinsurance segment declined by 14% to $119 million, primarily driven by this soft area of the market.

Pre-tax underwriting income was $66 million, this current quarter reflecting lower cat losses and relatively flat underwriting expenses. The growth in net premiums written of almost 3% year to date is earning through the income statements contributing to improving underwriting performance. The current accident, year loss ratio before cats was 61.5%. Cat loss is declined from $119 million or 7.5 loss ratio points of the prior year to $39 million this quarter or 2.4 loss ratio points.

A year ago, the industry experienced catastrophe events more significant than it's been seen in over a decade with Hurricanes Harvey, Irma, and Maria along with the two earthquakes in Mexico. I'll be it on a smaller scale, we were reminded again in 2018 that Mother Nature can deliver powerful storms like Hurricane Florence and Typhoon Jebi. Our losses from these storms have demonstrated that our cautious approach to underwriting global property risks is likely to continue to result in below average volatility.

Loss reserves developed favorably in the quarter and prior year quarters by $7 million or approximately 0.5 loss ratio points. Accordingly, our reported loss ratio is 63.5% for the third quarter of 2018. The expense ratio of 32.4% represents a decline of 0.2% from the year ago quarter and was lower than the consecutive quarter of 33.3%. In dollar terms, our underwriting expenses are relatively flat for the comparative quarters and year to date.

As the growth in net premiums written earned through the income statement in coming quarters, we'd expect and improving expense ratio. In addition, as several new businesses reach scale, we believe their contribution will further improve the expense ratio. We have and continue to look at ways to streamline our processes internally. Not only does this create efficiencies and strengthen our service offering, but it also minimizes the cost of doing business. This brings our reported combined ratio for the third quarter of 2018 to 95.9% and our accident year combined ratio excluding cats to 93.9%.

Investment income increased 31% or $44 million to $186 million. The core portfolio increased approximately $15 million, led by fixed maturity securities. Higher base of invested assets and rising interest rates have benefited the income statement. Investment funds increased $26 million, primarily due to higher earnings from energy, aviation, to real estate funds. We've also maintained an average rating of AA- and an average duration of 2.9 years for fixed maturity securities including cash and cash equivalent.

We reported pre-tax, net-realized, and unrealized gains of $22 million. Due to the change in accounting for equity securities adopted in 2018, there are now two components comprising pre-tax gains. The first is pre-tax realized gains from the sale of investments of $154 million. Second is the change in unrealized gains on equity securities of $132 million, resulting from the adoption of this new accounting pronouncement. The change in unrealized gains on equity securities is not reflected in any prior year's income statement results and therefore creates an inconsistency to comparable periods.

Had no change occurred in this treatment, our annualized pre-tax return on equity for the quarter would have been approximately 10% higher. We recognize foreign currency gains of $17 million in the current quarter, approximately $15 million of which primarily is due to the strengthening US dollar relative to Argentine pesos.

Beginning in July 2018, Argentina is considered hyperinflationary. Under the accounting rules, hyperinflation arises when the cumulative inflation over three years is equal to or greater than 100%. Accordingly, we were required to change the functional currency from Argentine peso to US dollars for Argentine operations.

The effective tax rate was 21.4% for the quarter. The total income tax expense reflects the reduction in the US statutory tax rate from 35% to 21%. The effective tax rate differs from the US federal income tax rate of 21%, primarily because of tax exempt investment income offset by foreign operations with a higher tax rate.

Stockholders equity increased slightly quarter of quarter and from the beginning of the year. The combination of lower unrealized gains on fixed maturity securities due to rising interest rates and the return of capital offset much of the earnings in the quarter and year to date.

Fortunately, our early decision to maintain a short duration on our fixed maturity portfolio has positioned us well to minimize the adverse impact on the balance sheet, while benefit from rising interest rates through the income statement. We also returned capital to investors of $79 million in the quarter. Finally, our return on equity for the quarter on an annualized basis was 12% on net income.

Thanks, Rob.

Robert Berkley --President and Chief Executive Officer

Great, Rich. Thank you very much. Amani, now we would be pleased to open it up for questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press the * then the 1 key on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated.

Our first question comes from Amit Kumar with Buckingham Research. Your line is now open.

Amir Kumar--Buckingham Research -- Analyst

Hey, thanks and good afternoon. Just a couple of quick questions. The first question I had for you, Rob, was I was trying to tie your commentary on pricing of 3.9% with your frustration of the industry behavior regarding what they are doing. Does that mean that we should anticipate a continued upward trajectory in WRB's pricing or am I simplifying the thought process too much?

Robert Berkley --President and Chief Executive Officer

Well, from our perspective, I think it's pretty clear that in many lines of business, lost costs are moving up. Worker's comp may be one of the few phenomenon where we are seeing certain components of the lost cost, particularly the frequency trend being negative, which again, unnerves to the benefit.

But overall, when you look at the level of financial inflation in the broader system and if you look at the level of the social inflation that there's a growing evidence around, we think that there are lots of ways to affect rates. Again, one is the price you charge. One is terms and conditions, attachment points, deductible, etc.

Our view is that given the level of inflation that is in the system that prevents itself in many different ways, one needs to be taking appropriate action. So, yes, when we talk about 3.9% of rate, that is just being driven by the pricing. We are doing other things as well which we think will impact the margin.

Amir Kumar--Buckingham Research -- Analyst

Got it. That's actually very helpful. The other question I had was going back to the broader discussion on expense ratio. I know Rich made some comments and there were some specific comments in the press release. In the past, I guess we have talked about a 1% to 2% number. Are we still on track for that? Could we even end up doing better than that?

Robert Berkley --President and Chief Executive Officer

I don't want to get ahead of ourselves. I think as we've commented in the past, we are running at a 33-something pretty consistently. We are looking to take a point off that over time consistently. Once we have gotten to that new level, then we will look to see are there opportunities for us to improve from there. But again, I would caution you and others -- please keep in mind that occasionally, we need to make certain types of investments in order to position ourselves to improve, which could come at a cost.

Amir Kumar--Buckingham Research -- Analyst

Got it. That's helpful. Maybe just to sneak one more quickly and I'll stop -- do you have any early indications what your Hurricane Michael exposure might be?

Robert Berkley --President and Chief Executive Officer

Are we getting some loss notices? Yes, of course we are, as I presume others are in the marketplace. I think it would be really premature for us to begin to even speculate as to what that's going to be. Having said that, as you know and as we continue to demonstrate, we manage volatility and what we believe is a thoughtful and measured manner. Given our comments around our property pricing, particularly cat-exposed property, we tend to underweight that compared to the average, the norm, or our peers.

Amir Kumar--Buckingham Research -- Analyst

Good point. I'll stop here. Thanks for the answers and good look for the future.

Robert Berkley --President and Chief Executive Officer

Thank you. Thanks for calling in.

Operator

Thank you. Our next question comes from Kai Pan with Morgan Stanley. Your line is now open.

Kai Pan--Morgan Stanley -- Analyst

Good evening. To follow-up Amit's question on rates as well as inflation, if you balance these two, the rate increasing as well as you have inflation trends, will you be able to maintain the underwriting margin going forward or actually the rate increase itself outpace the loss inflation, you can have some improvements on it?

Robert Berkley --President and Chief Executive Officer

Our expectation between the rate that we are looking to achieve and we've been able to achieve so far, as well as some of the other underwriting actions that we've taken, we believe that ultimately, it will inert the benefit of the margin and you will see margin enhancements on the underwriting side.

Kai Pan--Morgan Stanley -- Analyst

Okay. That's great. Then just to follow-up on worker's compensation commentary. You've seen active frequency trend. What we've heard from some other competitors talking about increasing frequency -- is something different, your writing versus the others?

Robert Berkley --President and Chief Executive Officer

Well, I'm not familiar with the others' book of business. I can only react to our portfolio. I would suggest that you might give a call to the folks over at NCCI. They put together some what I would define as very helpful broad data on the industry. I think that might give you some further insight and I would expect that would dovetail with our comments.

Kai Pan--Morgan Stanley -- Analyst

Okay. That's good. Then on the investment side, it looks like the alternative fund returns have been more the last few quarters. You cited energy and real estate funds. Are there any early indications for the fourth quarter results? I remember those results probably lagging the market in terms of reporting.

Robert Berkley --President and Chief Executive Officer

Yeah. Much of what's in there, we book on a quarterly lag. Having said that, I think it's a little bit early for us to really point you in a direction. I think Karen has given some historical guidance in the past and we have as well. I think it's somewhere between $15 million to $20 million a quarter. But again, if you look back over the history, there's a fair amount of volatility in that. It's a very different animal than the fixed income portfolio.

Kai Pan--Morgan Stanley -- Analyst

Okay. Last one, if I may, is on the realized losses -- in the past, you're always guiding $100 million a year. So far, you did $20 million in three quarters. So, how should we expect going forward? Is it going to be less because you've already realized a lot or is the current trend going to continue?

Robert Berkley --President and Chief Executive Officer

We continue to guide people toward the $25 million a quarter is the right plug, if you will, for your model. At the same time, as we have been quite empathic, the nature of the type of investment and how it gets realized, there is going to be a good deal of volatility. We've had a couple of good years. I would suggest you not make the assumption that that means we have gone through all of the opportunity to monetize. I would tell you the pipeline is deep and broad. At the same time, the timing of when that gets realized could easily vary by some number of quarters.

So, again, my suggestion to you is you continue to use the $25 million per quarter. At the same time, from our perspective, while it may not help you, the nature is there will be volatility in that.

Kai Pan--Morgan Stanley -- Analyst

Okay. Thank you. I was hoping Bill could make some comments on what asset classes he'll write for sort of harvest in terms of valuation.

Robert Berkley --President and Chief Executive Officer

I would suggest you give Bill a call. He's here, but I don't think he's doing that with a broad audience.

William Berkley --Executive Chairman

The long and the short of it is it's really an opportunistic decision. If an opportunity comes along, we'll harvest one after another. It really is purely opportunistic. I think that will continue to be where we are.

Kai Pan--Morgan Stanley -- Analyst

Great. Thank you so much.

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press * and 1 on your touchstone telephone. Our next question comes from Mike Zaremskin with Credit Suisse. Your line is now open.

Michael Zaremski--Credit Suisse -- Analyst

Thanks. Good evening, gentlemen. A follow-up on Kai's question and Rob, your remarks on worker's comp -- if we take into account the important nuance you brought up about payrolls and wage increases helping and then frequencies staying negative and we mesh that with pricing, which is negative, are margins staying steady or are they just deteriorating off of excellent levels? I'm just trying to get directionally where that line is going.

Robert Berkley --President and Chief Executive Officer

The thoughts that I would share with you are the following -- I think it varies greatly by territory. It varies greatly by class. So, I would be reluctant to use such a broad brush for really what requires a fine brush to provide as specific an answer as you're looking for. I would tell you there are clearly parts of the market, not the whole market, but there are parts of the market that we find really attractive still, in spite of what's been happening with the action coming out of the rating bureaus, which is why you see us continuing to grow the line of business as articulated in the release.

Michael Zaremski--Credit Suisse -- Analyst

Okay. That's fair. I know that's very nuanced by state. My next question is regarding the catastrophe load. It seems like it's continually below investors' expectations. I know you guys emphasized volatility management. So, portfolio mix has changed a good deal over the last ten decades. Honestly, I'm just taking the 10-year average. I'm just curious as to maybe I shouldn't be taking the 10-year average.

I'm sorry. We missed the last part of it. We were preoccupied with the ten decades and I turned to my boss and said, "How old are you?"

Robert Berkley --President and Chief Executive Officer

I'm a little younger than Bill.

William Berkley --Executive Chairman

That was not nice, Mike.

Michael Zaremski--Credit Suisse -- Analyst

So, yeah, I just don't have as much experience as you guys.

Robert Berkley --President and Chief Executive Officer

No. I think it would be appropriate to think that when you see cat activity, you should expect the experience on a relative basis for our organization to be relatively benign. The growth that you're maybe referring to in the product line exhibit that Richie, I think you threw into the release, is really driven by what I would define as what I would define as non-property short-tail lines. So, examples of that not limited to this, but examples of that would be surety as well as A&H.

But look, we have had and continue to have the view that this business is all about risk-adjusted returns. If and when there is an opportunity that we believe the risk-adjusted return makes sense in the property cat space, we are prepared to play that game. But we believe that when you think about risk, one needs to factor in volatility.

So, until you see a dramatic shift -- it would have to be very dramatic -- then you will continue to see us be underweighted in some of the cat-exposed lines. To the extent that rates get attractive, then we certainly will be sharing with you and other stakeholders to the extent our appetite has changed and why. We are not going to do anything that we don't think we get paid appropriately for the risk.

Michael Zaremski--Credit Suisse -- Analyst

If I can throw one last one in -- you mentioned the prepared remarks as well -- the real estate portion of the investment portfolio has grown by more than a couple points since year-end. How do you think about the total return opportunity in that portfolio. I'm just curious -- do higher interest rates make the opportunity to harvest maybe less promising over time?

William Berkley --Executive Chairman

No. First of all, we generally don't use leverage in our real estate portfolio. So, it hasn't really had much impact on us. Our real estate portfolio, I think we have one building that we have one mortgage on, but that's the total sum of our historic mortgages. It doesn't really have much impact on us.

Number two, we're developing projects. So, the increase in our investment and real estate is we finished a building in London. It's something like 60%-something rented up, maybe 70%, I don't know exactly at the moment. We have buildings in Washington that are just finishing up and we have finished 100% lease building in New York City.

So, what you have seen is our completion of buildings and renting them up, not new projects starting.

Michael Zaremski--Credit Suisse -- Analyst

Okay. Thank you very much for the color.

Operator

Thank you. Our next question comes from Joshua Shanker with Deutsche Bank. Your line is now open.

Joshua Shanker -- Deutsche Bank -- Analyst

Good evening, everybody. Excellent quarter. Good job. I would love to talk to you guys a little about your personal lines foray and understand if there's a new business penalty associated with acquiring business and what that happens over time. Given some Travelers' remarks -- we had this big fire out in California -- what is the appetite long-term for that kind of business? Obviously, you're looking for a specialty business, but I'm trying to understand your overall appetite.

Robert Berkley --President and Chief Executive Officer

Josh, let me repeat the question back to you to make sure I got it correct, if you don't mind. Were you asking about Berkley One, our personal lines business or just in general our exposure to cat? I just want to make sure I have it clear.

Joshua Shanker -- Deutsche Bank -- Analyst

So, Berkley One and how it relates to exposure to cat and if there's a new business penalty as you grow.

Robert Berkley --President and Chief Executive Officer

Okay. So, for starters, when you say new business penalty, what does that mean, exactly?

Joshua Shanker -- Deutsche Bank -- Analyst

In the past, certainly Bill has said that unlike a lot of companies, you like to write new business at a better margin than business that's already on your books. You understand the nature of the business on your books, but taking on new business, most companies say, "We don't know that business as well," so, often times it contains losses and a loss profile that's in excess of what you might have expected. I guess that's what I mean.

Robert Berkley --President and Chief Executive Officer

Okay. I appreciate the clarity. Maybe as far as that piece right off the bat, we do not burn our way into the market, maybe to put a slightly finer point on it, whether that be due to selection or pricing or whatever. Our colleagues that are running the business are true professionals. Not only do they have the technical expertise but we have a shared set of values out of respect of the capital that our various stakeholders provide us.

So, is it possible at any given one-off risk that we could be cheaper than Competitor C? Yeah, it's certainly possible, but it's also possible on the next three quotes that we would be less competitive than Competitor C or Competitor A or Competitor P. So, to make a long story short, no, I do not believe that we are burning our way into the market and philosophically, I don't think the folks that are running that part of the business on behalf of the shareholders subscribe to that at all.

As far as our overall approach to cat and exposures such as wildfire, it certainly is something that we have a high sensitivity to. We measure our exposure and our aggregates very carefully. We have some very skilled people in our ERM department making sure we understand what we have out there. We have a clear view around what our risk appetite is an organization.

Then ultimately, we will find partners that are looking to deploy capacity in the reinsurance market to help us manage whatever the exposure is beyond what our appetite may be. So, long story short, Berkley One has not changed our philosophy in general or our risk appetite.

Joshua Shanker -- Deutsche Bank -- Analyst

Do you have any way of framing in a five-year view how big Berkley One can be?

Robert Berkley --President and Chief Executive Officer

I think Berkley One five years from now is going to be very meaningful to our organization. I think it is meaningful today because of the contribution colleagues are making in building that and developing our franchise. I think that will only broaden from here as the financial contribution becomes something that will move the needle in a meaningful way for the group.

Joshua Shanker -- Deutsche Bank -- Analyst

Thank you for the answers.

Robert Berkley --President and Chief Executive Officer

Thanks, Josh for calling in.

Operator

Thank you. Our next question comes from Meyer Shields with KPW. Your line is now open.

Meyer Shields--Keefe, Bruyette & Woods, Inc. -- Managing Director

Hi, how are you?

Robert Berkley --President and Chief Executive Officer

Great. How are you?

Meyer Shields--Keefe, Bruyette & Woods, Inc. -- Managing Director

Doing well, thanks. Rob, in your prepared comments, you talked about terms and conditions. Is there a market trend right now where terms and conditions are an area of competition in insurance?

Robert Berkley --President and Chief Executive Officer

I think there certainly are pockets of the market where you see standard market appetite expanding and consequently, you'll see a relaxing of terms and conditions and I think there are some meaningful parts of the market that are moving in the other direction, where you'll see a tightening of terms and conditions as well and your seeing business exit the standard markets.

So, again, I'm not trying to be difficult, but it really varies depending on what pocket of the market you're referring to. I reference the terms, conditions, attachment points, deductible, etc. because people tend to get very focused on did your rate move up, how much did it move down, how much. Those are really important things. Certainly, our rate monitor tries to capture some of that. I will tell you I don't think any rate monitor is able to fully capture changing terms, conditions, etc.

Meyer Shields--Keefe, Bruyette & Woods, Inc. -- Managing Director

That's helpful. That makes a lot of sense. Within the general liability lines, you've talked about social inflation for a while. Is that trend accelerating or is it just sort of worse than it had been but at the same level?

Robert Berkley --President and Chief Executive Officer

I think it's like a lot of things. It's very difficult to determine that over a short period of time. I think clearly, as we get a few more quarters under our belts, it will become more evident. I would tell you we have a little bit of data, but I think the growing gut feel within our organization is that you're seeing a resurgence in activity and effort in the plaintiff bar. You've obviously seen some very large awards coming out of juries. Often times, when you see these large numbers, that tends to set the bar for what other awards may be as a new reality.

So, again, I don't feel as though anyone has enough evidence or data at this stage to be able to point you definitely in a direction, but I think there is a growing amount of data that would support there is good reason to have concern around the social inflation idea.

Meyer Shields--Keefe, Bruyette & Woods, Inc. -- Managing Director

Okay. Thank you so much.

Robert Berkley --President and Chief Executive Officer

Thanks for calling in.

Operator

Thank you. Our next question comes from Brian Meredith with UBS. Your line is now opening.

Brian Meredith -- UBS -- Managing Director

Good evening. Actually, that was kind of my question, but Rob, let me just follow-up on the social inflation here -- what do you think is going to be driving it here going forward? If you look at the court system right now, we're back to a balanced appellate court system as far as republicans and democratic-appointed judges, we've obviously got a favorable Supreme Court. How do you think that impacts things going forward?

Robert Berkley --President and Chief Executive Officer

I think the pendulum tends to swing back and forth, as we've observed. I think there's a delay. We've expressed the view on the past and it continues to be our view, Brian, that part of the resurgence in the plaintiff bar and perhaps some of what you see coming out of juries is a reflection of the environment over the past eight years that we had Washington really very much influenced through more of a democrat lens. I suspect if you role the movie forward, over time, you'll see the pendulum swinging the other way. There's clearly a delay.

Brian Meredith -- UBS -- Managing Director

That makes a lot of sense. The same thing, Rob -- you made the comment you're seeing some frequency on worker's compensation insurance -- can you tell us what drives that to kind of pop back up the other way.

Robert Berkley --President and Chief Executive Officer

Again, I don't know that anyone can scientifically, if you will, or mathematically prove what has driven this relatively benign environment for an extended period of time, even though there's data that would suggest it has to do with safer workforce, medical costs as well, and a variety of other things.

I would suggest that perhaps one of the larger concerns that we have that could send it sailing back to the other direction, putting aside what we can do as far as managing costs, would be a very, very tight workforce, like one that we're seeing today sub-4%. What ends up happening when you have an environment like that, often times, Brian, you get people in jobs that they have not received an appropriately level of training for.

That often times could lead to accident and injury. You also get people working overtime and often times, people get a degree of fatigue. That can lead to accident and injury. My crystal ball is pretty much as foggy as anyone else's, but that certainly is one of the things that when we lock ourselves in a room together and try to figure out where things are going, that's one of the thoughts we kick around.

Brian Meredith -- UBS -- Managing Director

Thank you.

Operator

Thank you. Our next question comes from Ryan Tunis with Autonomous Research. Your line is now open.

Ryan Tunis--Autonomous Research -- Analyst

Good evening, guys. I had a couple on underwriting and one on expenses. I guess on the underwriting side, how would you characterize this quarter in terms of man-made losses, short-tail stuff that's non-cat. Does that seem to help the loss ratio or did it hurt a little more?

Robert Berkley --President and Chief Executive Officer

I think it was right up the middle, by and large. I think the improvements that we've been talking about that you'll see with time are going to come as a result of rate and changes that we are making on the underwriting front as far as not just pricing again and not just terms and conditions, but selection as well.

Ryan Tunis--Autonomous Research -- Analyst

Actually, that was my follow-up. So, on the terms and condition, the risk selection -- I know in the past, you've talked about moving up in attachment points -- philosophically, does that change the volatility of your results at all? Are you more likely to have lumpy quarters that you're higher up? Is there any offset, do you think? Obviously, that's going to help margins, but is there any caution about what that might do from a volatility standpoint or anything else?

Robert Berkley --President and Chief Executive Officer

Again, as we suggested, under the lens of volatility, risk-adjusted return, we are focusing on property cat in the comments earlier. Volatility in general is something that we are very sensitive to. I would caution you not to make the leap that in some cases where we adjust attachment points that that would have a dramatic impact on the type of volatility we have in our portfolio.

I would also remind you that the lion's share of the business that we write is not large account or even in an excess power. The vast majority of the business we write is relatively small limit business. So, I think as a data point, more than 85% of our policies have a limit of $2 million or less. So, when you think about that in the context, we are not a big excess market and we are not a subscription market in a big way. The lion's share of what we do, we write the whole individual account.

Ryan Tunis--Autonomous Research -- Analyst

Got it. Then on the expense side, I'm not exactly sure what's been happening with the ratio in reinsurance, but it looks like one place you've made a lot of improvement has been reinsurance. It looks like you're at a low-40s selling at operating expense run rate now and that was just over a year ago. Just some color, I guess, on what are some of the changes you're making there?

Robert Berkley --President and Chief Executive Officer

We've had a shift in the portfolio. I'm going to give you my two seconds, then Rich can give you a little bit more color. Rich, that was my head's up it's about to come over to you. What's happening is we've had several structured deals there where the loss ratio had a quarter or cap on it, if you will, and the commission was on a sliding scale. The commissions were particularly high. The colleagues running the business decided pursuing those in general did not make a lot of sense going forward. Commissions came down, scale of the business came down, internals went up. I'm done.

I think that's a fair summary, Rob. The other point that I would add is that as we see on the commission side, as you're pointing out a reduction, the fixed costs are obviously down a little bit as well. That reduction is not enough to counter the effect of the earned premium reduction that we're seeing coming through quarter over quarter. So, it's really just a reflection of that fixed and variable cost proportion to the earned premium.

Ryan Tunis--Autonomous Research -- Analyst

I guess just keeping it here on expenses for a second, but Rob, it did kind of sound like you were cautioning run-rating this level of expenses this quarter going forward.

Robert Berkley --President and Chief Executive Officer

If that was the message that I sent to you and others or if I left you with that impression -- what I'm suggesting is this -- we've been running at a 33-something give or take more often than not for a while. We expressed a desire to take a point off of that. Once we get that accomplished, we will be as a group looking to see are there opportunities to improve from there.

I would suggest, I guess, the additional comments were I would just remind people that in order to make this progress, occasionally one has to take a half a step back in order to take two steps forward. I am not suggesting to you -- I'm not in any way, shape, or form what your assumption should be, that assumption is your assumption. I am telling you that I think some of the progress we have been looking to make was visible in the quarter. At the same time, we do have other initiatives that can move it back in the other direction temporarily.

Ryan Tunis--Autonomous Research -- Analyst

Okay. Very good. Thanks, guys.

Operator

Thank you. Our next question comes from Yaron Kinar with Goldman Sachs. Your line is now open.

Yaron Kinar--Goldman Sachs -- Analyst

Thank you very much. Rob, in your prepared comments, you expressed some frustration over the way the industry is behaving right now. I guess my question to you would be are your expectations of the industry different than what the industry has done over time, namely we're seeing non-investment income improve, interest rates rise.

We haven't quite seen losses emerge at any significant scale just yet, industry capacity remains abundant. I think you guys have been in this industry way longer than I've looked at it, but in your experience, have you seen the industry raise rates in such an environment?

Robert Berkley --President and Chief Executive Officer

So, I am going to yield to my boss who has decades more experience than I do. I think he can give you a better perspective than I.

William Berkley --Executive Chairman

I don't like being referred to as decades. The long and the short of it is I think you have different sources of capital that are responding to losses in different ways than this industry has historically responded. So, yeah, it is different than it was, primarily because the capital is in this industry for marginal returns over and above their investment returns. People are looking at their investment returns in a different way.

I think that's going to all change -- and it will at some point -- when the catastrophe losses are large enough that it impacts people who find that the unforeseen event is greater than the actuarily protected result. That will happen. We just don't know exactly when. We had periods of time where we had three and four hundred-year events in a period of five or seven years. That's the kind of thing that could dramatically change the outcome.

Sandy wasn't even a hurricane. Imagine if it was a hurricane. Imagine if a 38 kind of hurricane came across where it did last time. The losses on Long Island and Rhode Island alone would be bigger than any storm we have seen. So, I think that you aren't seeing people react because they're relying 100% on the predicted modeled result and if you've been in the business long enough, you know predicted modeled results are only averages based on statistics. They're not perfect. I think this business has become much more predictive and modeled.

Yaron Kinar--Goldman Sachs -- Analyst

Okay.

William Berkley --Executive Chairman

I do think it is behaving in a different way at the moment. We'll see whether that's justified or not.

Yaron Kinar--Goldman Sachs -- Analyst

Got it. I appreciate the thoughts. I guess the other question, Rob, in your prepared comments you also talked about D&O particularly for large accounts as being an area that seems especially concerning right now. We've all seen the data around frequency picking up and defense costs being up. Is there anything else that is driving your concern there, specifically the large accounts? On top of that, do you see the private market, the smaller market as an area that could be a port in the storm if the trends that you're seeing in large public do indeed go through?

Robert Berkley --President and Chief Executive Officer

Again, from our perspective, the D&O space in general is pretty competitive. As far as opportunities or niches within the D&O space, we prefer not to get into where we see the pockets of opportunity. Again, the large accounts, we all read about the loss activity. If you pick up the Wall Street Journal, you can't help but stumble across it. There's been a fair amount of loss activity.

There's been a frequency of severity, if you will. That's not uncommon for the D&O space. I think the problem is that the market has been very competitive for an extended period of time. I'm not sure there is an appropriate level of premium to be able to endure the level of loss activity. I think that's particularly noteworthy and what I would define as the Fortune 5000.

Yaron Kinar--Goldman Sachs -- Analyst

Got it. Thank you very much.

Operator

Thank you. This concludes today's Q&A session. I would now like to turn the call back over to Mr. Rob Berkley for closing remarks.

Robert Berkley --President and Chief Executive Officer

Okay. Thank you very much. We appreciate you all calling in. From our perspective, again, it was a solid quarter. It was an opportunity for us to demonstrate how we manage risk and return, particularly in this quarter under the lens of property cat. We spent a good deal of time focused on a lot of things in how we manage the business.

We try not to spend our lives being obsessed with what's in the rearview mirror, but actually looking out the front windshield, hence how we have been positioning the investment portfolio for an extended period of time, as well as the actions we've been taking on the underwriting side. We think there are clearly opportunities in the marketplace. We are pleased with the strength and stability of our platform. So, thank you all again for calling in. We look forward to talking about another successful quarter with you in 90 days.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.

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